“If the level of financial gearing in a company increases, shareholders face more financial risks because the level of their dividends become more variable.” Could you please explain to me the fact of why dividends become more variable? Thank you…

The only reason that dividends fluctuate is because operating profits fluctuate.

If there is gearing then there is fixed interest payable out of the operating profits before dividends can be paid, and the greater the fixed interest then the greater will be the fluctuations of the amount available for dividend.

I illustrate exactly what is happening (and why) in my lectures working through Example 1 of Chapter 13 of our free lecture notes.

the answer on lecture notes is (6000/110000), understand that 6000 is the interest, and given the market value is $110. But how can it comes to 110000? (I guess it is $110 * 1000? but I can’t find where the 1000 comes from.)

The total nominal value of the debentures is $100,000 on the SOFP. As I make clear in earlier lectures, the nominal value of each debenture is $100 unless told differently. Therefore the market value of the debentures is 110/100 x 100,000 = $110,000.

(I do hope that you are not using the notes without watching the lectures, because this would be pointless. The notes are just lecture notes – not a study text – and it is in the lectures that I explain and expand on the notes. If you are not watching the lectures for any reason then it is essential that you buy a study text from one of the ACCA Approved Publishers and study from there.)

Thank you sir for this lecture, very clear.
Please would these other financial ratios formulas be provided in the formula sheet or I am expected to know them for the exams.

The only formulae given in the exam are those on the formula sheet that is printed in our free lecture notes. You are not given the formulae for these financial ratios.

Hi john please can you explain the comment you made again as to why a higher dividend cover means more retained profit? Is this something to do withthe dividend being maintained in the future and not increasing? Thank you

thulasikaur says

Hi sir, why did not include the preference share for dividend per share calculation?

John Moffat says

Because we calculate the dividend per share for the ordinary shares (the preference shareholders receive a fixed dividend).

XianXian says

“If the level of financial gearing in a company increases, shareholders face more financial risks because the level of their dividends become more variable.” Could you please explain to me the fact of why dividends become more variable? Thank you…

John Moffat says

The only reason that dividends fluctuate is because operating profits fluctuate.

If there is gearing then there is fixed interest payable out of the operating profits before dividends can be paid, and the greater the fixed interest then the greater will be the fluctuations of the amount available for dividend.

I illustrate exactly what is happening (and why) in my lectures working through Example 1 of Chapter 13 of our free lecture notes.

k5031146 says

a little bit confuse with the interest yield.

the answer on lecture notes is (6000/110000), understand that 6000 is the interest, and given the market value is $110. But how can it comes to 110000? (I guess it is $110 * 1000? but I can’t find where the 1000 comes from.)

Thank you so much in advance.

John Moffat says

The total nominal value of the debentures is $100,000 on the SOFP. As I make clear in earlier lectures, the nominal value of each debenture is $100 unless told differently. Therefore the market value of the debentures is 110/100 x 100,000 = $110,000.

(I do hope that you are not using the notes without watching the lectures, because this would be pointless. The notes are just lecture notes – not a study text – and it is in the lectures that I explain and expand on the notes. If you are not watching the lectures for any reason then it is essential that you buy a study text from one of the ACCA Approved Publishers and study from there.)

OnyinyeOfor says

Thank you sir for this lecture, very clear.

Please would these other financial ratios formulas be provided in the formula sheet or I am expected to know them for the exams.

Thank you

John Moffat says

The only formulae given in the exam are those on the formula sheet that is printed in our free lecture notes. You are not given the formulae for these financial ratios.

manishatai says

Hi john please can you explain the comment you made again as to why a higher dividend cover means more retained profit? Is this something to do withthe dividend being maintained in the future and not increasing? Thank you